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Panel makes case for Kerala to increase own tax revenue
July, 17th 2006

Report cites `major structural failing' in tax receipts

The State's total revenue receipts grew by 12.7 per cent on an average in 2003-04 and 2004-05, the first two years of the Act. The own revenue of the State now is around Rs 11,000 crore, which amounts to 10 per cent of GSDP.

Thiruvananthapuram , July 16

A strong case has been made out for Kerala to increase its own tax revenue to bring about the fiscal correction mandated by the Fiscal Responsibility Act, 2003.

According to the first report of the Public Expenditure Review Committee, constituted under the Act, the State's total revenue receipts grew by 12.7 per cent on an average in 2003-04 and 2004-05, the first two years of the Act.

This was higher than the annual average of 10.2 per cent achieved over the three years immediately preceding the Act.

However, the higher receipts were driven by the higher growth of transfers from the Centre in the form of tax shares and grants. This worked out to 18.4 per cent over 2003-05, compared to 6.2 per cent over 2000-03.

On the other hand, the State's own tax revenue registered a lower annual rate of growth at 10.8 per cent in the first two years of the Act than the 12 per cent in the preceding three years.

The buoyancy of own tax revenue in relation to nominal Gross State Domestic Product (GSDP) came down to 0.9 as compared to 1.3 over 2000-03.

The report said that this showed the State had not been able to translate the higher rate of GSDP growth into higher growth of own revenue.

There might have been a drop in own tax efforts because of the higher flow of revenue from the Centre. This is a major structural failing, the report added.

However, the only redeeming feature was that the annual growth of the State's own revenue had been more uniform in the post-Act period than the fluctuations seen in the three preceding years.

The own revenue of the State now is around Rs 11,000 crore, which amounts to 10 per cent of GSDP. Of this, the own tax component had been steady at nine per cent of GSDP in the three years up to 2004-05.

Though this compares well with the other Southern States, the differentiating factor is that Kerala receives substantial remittances from expatriates outside. These remittances do not figure in GSDP figures at the State level.

Since the taxes are levied on expenditure, funded out of external remittances as well, the State's own tax revenue to GSDP ratio should be higher than for the other states, which do not receive remittance income, the report said.

Mony K. Mathew

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